ING, DING and NING trustsArticle added by Julius Giarmarco on July 10, 2014
Ranked: #25 (2,250 pts)
An ING trust is short for “incomplete non-grantor trust”; a NING trust is short for “Nevada incomplete non-grantor trust”, and a DING trust is short for “Delaware incomplete non-grantor trust.” These are trusts where a grantor residing in a high-income tax state transfers income-generating or appreciating assets to an irrevocable non-grantor trust in a state that will not subject the trust’s income and capital gains to state income taxes (like Nevada and Delaware). In the typical ING, the grantor is a beneficiary of the trust.
For an ING trust to be effective, (1) the trust must be a non-grantor trust for income tax purposes; (2) transfers to the trust must not be completed gifts, and (3) beneficiaries serving on the “distribution committee” (see below) must not be deemed to have made gifts as a result of their participation on the distribution committee. ING trusts are state income tax planning tools and do not remove the trust property from the grantor’s estate. Accordingly, an irrevocable life insurance trust (ILIT) should accompany the ING trust to provide the liquidity to pay estate taxes.
In PLRs 201410001 through PLR 201410010, the IRS released a series of favorable private letter rulings on the federal tax treatment of ING trusts. Although the PLRs can only be relied on by the taxpayers requesting the rulings, they are an indication of the IRS’s position on ING trusts. In the PLRs, the trusts were structured as follows:
1. The grantor created an irrevocable trust in a no-tax state with a corporate trustee located in that state.
2. A distribution committee comprised of the grantor and at least two beneficiaries other than the grantor must exist during
the grantor’s lifetime.
3. The trustee must distribute the income and principal of the trust to the grantor and other beneficiaries as directed by the distribution committee.
4. The distribution committee must act (a) by a majority vote of the members, with the grantor’s written consent; (b) by the unanimous consent of the members, other than the grantor; or (c) by the grantor, acting in a non-fiduciary capacity, with regard to principal only for the health, education, maintenance and support of the other beneficiaries.
5. The grantor has a testamentary limited power of appointment to appoint the trust property to anyone other than the grantor’s
estate, the grantor’s creditors, or the creditors of the grantor’s estate.
Based upon the above structure, the IRS ruled that (1) the trust would be a non-grantor trust (so that the grantor would not be taxed on the trust income); (2) transfers to the trust would be wholly incomplete gifts (so that the grantor is not making taxable gifts); (3) the distribution committee members would not be deemed to have made gifts to the grantor when consenting to distributions to the grantor; and (4) trust distributions to the other beneficiaries would be deemed completed gifts by the grantor.
For an ING trust to work, the trust must be established under the laws of a state that allows for domestic asset protection trusts (DAPTs) and that does not have a state income tax (e.g., Delaware, Nevada, Alaska and South Dakota). The reason is that Chief Counsel Advisory 201208026 held that retaining a testamentary power of appointment only avoids a taxable gift to the remainder beneficiaries, but not to the current beneficiaries. Thus, according to the Advisory, the grantor must also retain a lifetime power to cause an incomplete gift. But retaining any lifetime power would also cause the trust to be a grantor trust. However, in the DAPT states mentioned above, it’s possible to include lifetime powers for the grantor in the trust agreement without causing grantor trust status.
Not surprisingly, high income tax states do not like ING trusts. Some states, like New York and California, have already enacted or
changed their laws eliminating or limiting the benefits of an ING trust.
Finally, it’s important to recognize that the state income tax savings may come with a cost. Given the fact that non-grantor trusts reach the highest income tax bracket (39.6 precent), capital gains tax (20 percent), and net investment income tax (3.8 percent) at only $12,150 of income (for 2014), having the income taxed in the trust, as opposed to the beneficiaries, may offset the advantage of an ING trust. Thus, allowing the trustee to make distributions to those beneficiaries in lower tax brackets can minimize both federal and state income taxes.
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISERS AS TO THEIR SPECIFIC SITUATION.
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